Guarding against a grain drain

Related tags Risk Trade

Guarding against a grain drain
Risk strategies key in a market increasingly governed by hedging and forward planning

Dealers predict that trading relationships between cereal processors, grain traders and growers will change dramatically as manufacturers seek insulation from future price volatility and lock in adequate supplies.

Cargill, the UK's largest grain trader, said it was increasingly required to build strategic links and handle risk management for buyers and suppliers, and predicted more contract-growing and forward buying.

"Most people can absorb or stretch the costs of a market that may move £5 to £10, top to bottom," said a senior trader. "But in a market that doubles, while people with such strategies in place won't see a problem, those who are very transactional, will.

"If you compare gain prices to sea levels, at the moment levels are up. Next year, they will start to calm, but across all sectors some people will sink. I would advise millers to have a risk management strategy."

Alex Waugh, director of the National Association of British and Irish Millers said that processors were increasingly limiting their exposure through forward buying and hedging. Contracts did not guarantee supply, he warned.

Prices for next year were, in any case, cooling. Cargill reported around £45/t less for wheat trading in November 2008. "Everybody is expecting the price to come back, but not to revert to the position we were in, which makes a lot of sense," said Waugh.

Early signs are that more UK wheat will reach the market next year, after temporary suspension of the set-aside rule, which forces European farmers to take 10% of land out of production.

But while agriculture ministers in Brussels talked of 10M extra tonnes of grain being produced, industry was more cautious, forecasting just 1.6Mt to 2.9Mt.

A spokesman for the National Farmers' Union, said UK farmers were poised to bring 200,000h back under the plough, roughly half the country's non-productive set-aside. "We have special circumstances, so there will be a higher proportion coming back in than anywhere else," he said.

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